Shares of CF Industries Holdings (CF -0.29%) jumped nearly 12% today after the company announced second-quarter and first-half 2018 earnings. The fertilizer producer achieved record quarterly sales volume, announced a $500 million share repurchase program, and said it still plans on repaying $500 million in long-term debt due by May 2020 (just in case Wall Street thought the share buybacks would conflict with the previous promise).
As president and CEO Tony Will commented:
The story of the first half of 2018 was that of lower North American gas costs and higher nitrogen prices, driving a 33 percent increase in adjusted EBITDA over last year. As we look forward, we expect our cash generation to grow due to a tightening nitrogen supply and demand balance, supported by higher energy costs in other regions of the world. As a result, we will begin returning excess cash to shareholders.
As of 12:09 p.m. EDT, the stock had settled to a 7.5% gain.
After years of imbalance in the global fertilizer markets, this was exactly what Wall Street and investors were waiting to hear. Higher production costs in Europe and China tightened supply -- higher coal prices in China led to a 74% drop in urea exports in the first half of 2018 compared to the year-ago period -- and drove prices for nitrogen fertilizers higher in the first half of 2018. That's a trend CF Industries expects to continue in the back half of the year.
The timing should work out pretty well for investors. That's because CF Industries acquired its nitrogen partnership, Terra Nitrogen, in an all-cash transaction in the first few days of April. The acquisition made an immediate impact to the bottom line and will continue to bolster margins and cash flow in the second half of 2018.
Expectations for continued improvement should excite investors, especially considering that second-quarter 2018 gross margin jumped to 24%, up from just 15.4% in the year-ago period, helped by higher selling prices and lower natural gas prices. That drove a 54% increase in adjusted EBITDA in that span, and a 33% increase in the metric between the first halves of the last two years.
There's a long way to go for fertilizer stocks to make up all the ground that was lost in the last five years or so. However, judging from results around the industry -- and for this nitrogen fertilizer leader specifically -- it seems many businesses have been repositioned to take advantage of slowly improving market dynamics and to be more resilient in the face of uncertainty.
Considering that CF Industries plans to immediately divert improving cash flow toward a $500 million share repurchase program and a $500 million balance sheet makeover by paying off debt, long-term shareholders might have a lot to look forward to.